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Regulating the Culture of Banks in the United Kingdom: Strengthening legal accountability or just better leadership? Prof. James McCalman 1 , Dr. Angus Young 2 and Dr. Raymond Chan 3 Abstract: The Senior Managers Regime came into effect in March 2016. It is expected to change the behaviours of senior bank managers and transform the culture of banks through individual accountability and sanctions for non-compliance. However, without due consideration to the leader-follower dynamics, it is difficult to see how law reforms could compel a cultural shift in banks beyond superficial compliance. Introduction: The Global Financial Crisis (GFC) in 2008-9 and successive bank scandals in the United Kingdom had far-reaching adverse effects on the economy and the wider socio-political landscape. Distrust and dissatisfaction amongst the British public of banks were widespread as 1 Professor of Management and Director, Centre for Strategy and Leadership, University of Portsmouth, Email: [email protected] 2 Senior Lecturer, Department of Accountancy and Law, Hong Kong Baptist University, Distinguished Research Fellow, German-Sino Institute of Legal Studies, Nanjing University, and Adjunct Fellow, Western Sydney University Law School, Email: [email protected] 3 Associate Professor and Head, Department of Accountancy and Law, Hong Kong Baptist University, Email: [email protected]

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Page 1: Regulating the Culture of Banks in the United Kingdom: … · 2017-06-28 · banks beyond superficial compliance. Introduction: The Global Financial Crisis (GFC) in 2008-9 and successive

Regulating the Culture of Banks in the United Kingdom:

Strengthening legal accountability or just better leadership?

Prof. James McCalman1, Dr. Angus Young2 and Dr. Raymond Chan3

Abstract:

The Senior Managers Regime came into effect in March 2016. It is expected to change the

behaviours of senior bank managers and transform the culture of banks through individual

accountability and sanctions for non-compliance. However, without due consideration to the

leader-follower dynamics, it is difficult to see how law reforms could compel a cultural shift in

banks beyond superficial compliance.

Introduction:

The Global Financial Crisis (GFC) in 2008-9 and successive bank scandals in the United

Kingdom had far-reaching adverse effects on the economy and the wider socio-political

landscape. Distrust and dissatisfaction amongst the British public of banks were widespread as

1 Professor of Management and Director, Centre for Strategy and Leadership, University of Portsmouth, Email:

[email protected] 2 Senior Lecturer, Department of Accountancy and Law, Hong Kong Baptist University, Distinguished Research

Fellow, German-Sino Institute of Legal Studies, Nanjing University, and Adjunct Fellow, Western Sydney

University Law School, Email: [email protected] 3 Associate Professor and Head, Department of Accountancy and Law, Hong Kong Baptist University, Email:

[email protected]

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the negative impact of the economic crisis affected many compelling the government to take

action.

In the summary Report by the Parliamentary Commission on Banking Standards (the

Report), it states that:

Too many bankers, especially at the most senior levels, have operated in an environment

with insufficient personal responsibility. Top bankers dodged accountability for failings

on their watch by claiming ignorance or hiding behind collective decision-making. They

then faced little realistic prospect of financial penalties or more serious sanctions

commensurate with the severity of the failures with which they were associated.

Individual incentives have not been consistent with high collective standards, often the

opposite.4

Thus, it is obvious that legislators are determined to rein in senior bank managers and make them

accountable for any future failings. The Report also went on note that:

Proponents of corporate governance solutions can be prone to overestimate the benefit

that their particular favoured measure will provide. Structural or procedural changes to

bank boards would not have prevented the last crisis and will not prevent the next one.

Nevertheless, the Commission has a number of proposals which, taken together, we

believe will help to bring about a desirable change in the culture and overall approach of

boards.5

4 Parliamentary Commission on Banking Standards, ‘Changing banking for good: Report of the Parliamentary

Commission on Banking Standards, Volume 1: Summary, and Conclusions and recommendations’ 12 June 2013, 8

< http://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf>. 5 Ibid., 41.

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From the statement, it is abundantly clear that the legislators were not convinced that reforms to

corporate governance or change in leadership is going to alter the bad behaviours of those who

manage and govern the banks. Something more profound and rigorous was needed.

According to the Chief Executive Officer of the Financial Conduct Authority (FCA),

Andrew Bailey,

Culture matters a great deal. However, culture is not a tangible thing that can be taken

down from a shelf and inspected. Culture is a way of doing things and a set of attitudes

that determine behaviour by everyone involved in the organisation. It is shaped by many

influences – incentive structures, risk management, the effectiveness of management and

governance – all of which are examined by FCA supervisors in the firms we regulate. 6

Furthermore, Jonathan Davidson the Director of Supervision of the FCA said that,

Changing culture is very difficult and we know it takes time. Why is this? It’s because

culture comes from the past. CEOs, boards, programmes, systems and controls come and

go regularly. Mindsets are developed and reinforced over years and even decades and are

passed down from one generation to the next… So, the stakes are high and we are and

will be paying very close attention to the culture of firms and what boards and

management are doing to shape the culture, of which governance is a key factor.7

6 Andrew Bailey, ‘The FCA is making senior management responsible for the culture in their firms’, The Guardian,

27 September 2016 < https://www.theguardian.com/business/2016/sep/27/the-fca-is-making-senior-management-

responsible-for-the-culture-in-their-firms>. 7 Jonathan Davidson, ‘Getting culture and conduct right - the role of the regulator’ (Speech delivered at the 2nd

Annual Culture and Conduct Forum for the Financial Services Industry in London, 12 July 2016)

<https://www.fca.org.uk/news/speeches/getting-culture-and-conduct-right-role-regulator>.

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Therefore, the regulatory solution was to introduce new stringent measures to provoke change

and alter the behaviours of senior bank managers. In essence, the reforms are aimed primarily at

reining in the leadership of banks and the financial services sector. However, there are very few

studies, in leadership terms, of the cause of why senior bank managers behaved badly.

One exception is a study by Kerr and Robinson’s in their assessment of the Scottish

financial sector’s ‘tartan mafia’ that, ‘[t]raditionally shared a class habitus and shared social

cultural capital inculcated through education, military service and sports, pastimes and

membership.’8 This emphasises notions of likeness and the difficulty in changing leader

behaviours. In relation to this, the former Dean of Henley Business School, Christopher Bones

describes the legacy of a leadership generation which dominated business, politics and the

media. In ‘The Cult of the Leader: A Manifesto for More Authentic Business’, Bones provides

compelling arguments related to what was wrong with leaders:9

1. The current leadership crop is a generation whose values were driven by a desire

to be seen as successful. They embraced the trappings of success as self-promotion. They

were deemed worth it because of the idea of leadership perfection and the shortage of

leadership talent.

2. McKinsey’s 1990’s ‘war for talent’ argued that talent was limited and

organizations competed for it by recruiting the best and paying them accordingly. This

was apparent in banking and financial services but the public sector also fell into this

trap.

8 R. Kerr and S. Robinson, ‘Leadership as an elite field: Scottish banking leaders and the crisis of 2007-2009’,

(2011) 7, Leadership, 151-173. 9 Christopher Bones, The Cult of the Leader: A Manifesto for More Authentic Business (John Wiley and Sons,

2011).

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3. Leaders used these arguments to push for a greater share of profits as the power of

the real owners of capital in businesses declined. Bones argues that remuneration

reporting and approval be compulsory and earnings ratios across businesses be reported.

Therefore, the factors that drive leadership and the climate in which they operate are far more

fluid than what the law envisages and stipulates. More fundamentally, the disciplines of law and

leadership stem from different assumptions about the human psyche, behavioral tendencies and

how social norms are molded. As such, the efficacy of the recent law reforms could be open to

question.

According to Maak and Pless responsible leadership can be construed as a, ‘values-based

and principle-driven relationship between leaders and stakeholders who are connected through a

shared sense of meaning and purpose through which they raise to higher levels of motivation and

commitment for achieving sustainable value creation and responsible change’.10 However, issues

such as, the locus of responsible leadership, in terms of level and distribution of power, the kinds

of behaviours and activities that would distinguish responsible leadership from other forms of

leadership, and the extent to which one can influence the purpose of business within a tightly

structured institutional framework of global capitalism are not directly addressed in the recent

bank reforms.

Whilst the recent reforms in the United Kingdom had endeavoured to transform the way

financial services sector do business, the focus of this paper is to examine the legal and

leadership dimensions of regulating bank culture. A key feature of the reforms is to empower the

regulators to intervene and regulate bank leadership so as to prevent similar failures from the

10 T. Maak and N. M. Pless, ‘Business Leaders as Citizens of the World: Advancing Humanism on a Global Scale’

(2009) 88, Journal of Business Ethics, 539.

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GFC and recent scandals from repeating. However, the notion of regulating culture is a novel

one as culture is a complex social phenomenal. It is thus fitting to re-examine how recent law

reforms anticipate the behaviour of senior bank managers would change and the culture of banks

to be transformed.

The Regulation of Culture via the Concept of Legal Accountability:

Early in April 2013, the then Director of Supervision of the FCA, Clive Adamson said that,

In many cases, where things have gone wrong, whether it is mis-selling of PPI or in

attempting to manipulate LIBOR, a cultural issue is at the heart of the problem. It is fair

to say that to many in the outside world, the cultural approach of doing the right thing has

been lost for financial services. It is clear to us, therefore, particularly as a conduct

regulator, that the cultural characteristics of a firm are a key driver of potentially poor

behaviour... For us, we [FCA] view culture through the lens of what matters to us as a

conduct regulator. This means an effective culture is one that supports a business model

and business practices that have at their core, the fair treatment of customers and

behaviours that do not harm market integrity.11

It is clear that the FCA views culture as a contributing factor to why banks behaved badly.

Andrew Bailey, who was then the Chief Executive of the Prudential Regulation Authority said in

his speech in May 2016 that, ‘Culture has thus laid the ground for bad outcomes, for instance

where management are so convinced of their rightness that they hurtle for the cliff without

11 Clive Adamson, ‘The importance of culture in driving behaviours of firms and how the FCA will assess this’

(Speech at the CFA Society delivered on 19 April 2013) <https://www.fca.org.uk/news/speeches/importance-

culture-driving-behaviours-firms-and-how-fca-will-assess>.

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questioning the direction of travel.’12 However, before exploring how the FCA regulates the

culture of banks, it is pertinent to discuss what culture is and whether culture can be regulated.

Freiberg writes that, “Culture’ is a social phenomenon and can be understood as ‘learned

knowledge, belief, art, morals, law and custom’ in society. It is a powerful force that may

determine the development and operation of a regulatory system.’13 From this statement, it is

evident that culture is a social norm rather than a set of written rules. This in turn is a challenge

for regulators or even legislators to draft a set of rules to regulate a social phenomenon.

This does not mean that law and culture exist in isolation from each other. The law can

help to shape culture, and as such be perceived as a product of a social construction,14 or a

creature of culture.15 Culture also plays a role in voluntary compliance of the law by supporting

moral congruence, motivating adherence and reducing deviancy.16 However, internal

contradictions between competing values may provoke discord or contest for dominance, and as

such is hierarchical, dynamic and fluid.17 Therefore, the relationship between the law and culture

is a complex one that is not easy to untangle into a neat set of statutory statements.18 Andrew

Bailey also reinforced that,

As regulators, we are not able, and should not try, to determine the culture of firms. We

cannot write a regulatory rule that settles culture. Rather, it is the product of many

things, which regulators can influence, but much more directly which firms themselves

12 Andrew Bailey, ‘Culture in financial services – a regulator’s perspective’ (Speech at the at the City Week 2016

Conference on 9 May 2016) <http://www.bankofengland.co.uk/publications/Pages/speeches/2016/901.aspx>. 13 Arie Freiberg, The Tools of Regulation (The Federation Press, 2010) 104. 14 Helen Stacy, Postmodernism and Law: Jurisprudence in a Fragmenting World (Ashgate, 2001) 57. 15 Sionaidth Douglas-Scott, Law after Modernity (Hart Publishing, 2013) 4. 16 Christopher Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement,

Compliance and Ethics (Hart Publishing, 2015) 35. 17 Fiona Haines, The Paradox of Regulation: What Regulation Can Achieve and What it Cannot (Edward Elgar,

2011) 45-6. 18 Sionaidth Douglas-Scott, Law after Modernity (Hart Publishing, 2013) 383.

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can shape. We seek to ensure that firms have robust governance, which includes

appropriate challenge from all levels of the organisation; and promote the acceptance that

not all news can be good and the willingness to act on and respond promptly to bad

news.19

Thus, the FCA sees the bolstering of good governance as critical to changing the banks’ culture.

Furthermore, Jonathan Davidson adds that,

The first factor shaping culture is ‘tone from the top’. As Gandhi advised: ‘be the change

that you want to see in the world’. We are therefore very interested to understand how

leaders are role modelling the professed culture… So, the role of all leaders is to

encourage a culture of personal responsibility and impress upon all staff the value of

good culture to the health of the firm and the FS [Financial Services] industry more

widely.20

The introduction of individual accountability is central to the FCA’s strategy to embed a culture

of personal responsibility within the banking sector.21 Accountability is well tested area of the

law. The term accountability can be characterized, ‘[a]s a process whereby individuals are

required to explain or justify their decisions or acts to another person or body in accordance with

certain criteria, and then to make amends for any fault or error.’22 Accordingly, decisions made

by individuals who are bound by accountability rules must be able to be justified, explained and

19 Andrew Bailey, ‘Culture in financial services – a regulator’s perspective’ (Speech at the at the City Week 2016

Conference on 9 May 2016) < http://www.bankofengland.co.uk/publications/Pages/speeches/2016/901.aspx>. 20 Jonathan Davidson, ‘Getting culture and conduct right - the role of the regulator’ (Speech delivered at the 2nd

Annual Culture and Conduct Forum for the Financial Services Industry in London, 12 July 2016)

<https://www.fca.org.uk/news/speeches/getting-culture-and-conduct-right-role-regulator>. 21 Financial Conduct Authority, ‘New accountability regime for banks and insurers comes into force’ (Press Release,

7 March 2016) <https://www.fca.org.uk/news/press-releases/new-accountability-regime-banks-and-insurers-comes-

force>. 22 Peter Vincent-Jones, The New Public Contracting: Regulation, Responsiveness, Relationality (Oxford University

Press, 2006) 75.

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subjected to scrutiny.23 Legal accountability involves an imposition of liabilities for failures in

performing one’s prescribed and proscribed set of mandated responsibilities.24 Further, if

accountability is made difficult because the task of allocating responsibility or culpability for

collective decisions is difficult to identify with great certainty,25 then a simple remedy is to

stipulate a narrow set of responsibilities for individuals.

Such regulatory strategy suggests that the rules are drafted on factual predication prone to

be either under or over inclusive.26 These rules are inclined to be generalized regulatory

measures dealing with a range of events and abstractions based on past and futuristic scenarios,

with tendencies to oversimplify the complexities associated with decision making in a dynamic

or even volatile environment.27 Furthermore, these regulatory instruments are also known as

command control type rules that might have peripheral influence on the attitudes and values of

the targeted group of regulated individuals.28 Empirical research has shown that the proliferation

of laws failed to deter or have a deterrent effect on corporate misconduct or white-collar

crimes.29 As such, strengthening accountability through the imposition of more or stricter legal

obligations might not yield the desired outcomes of what legislators and regulators intended.

This does not negate the fact that imposing more stringent accountability measures create the

perception that regulatory measures are in place to improve supervision of bank staff and

discipline those in charge, if misconduct occurred under their watch.

More important is how the debate on regulating the culture going to impact banks? This

goes into the heart of the matter - the goals and strategies of financial regulation. Principally, the

23 Arie Freiberg, The Tools of Regulation (The Federation Press, 2010) 266. 24 Iredell Jenkins, ‘Accountability, Legality and the Social Order’, in Sava Vojcanin (ed.) Law, Culture, and Values:

Essays in Honor of Gray L. Dorsey (Transaction Publishers, 1990) 163, 171. 25 Christopher Kutz, Complicity: Ethics and Law for a Collective Age (Cambridge University Press, 2000) 6-8. 26 Julia Black, Rules and Regulators (Clarendon Press, 1997) 7-9. 27 Ibid, 7. 28 Steven Vago, Law and Society (Pearson Education, 10th ed, 2012) 329. 29 Sally Simpson, Corporate Crime, Law and Social Control (Cambridge University Press, 2002) 45-60.

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purpose of financial regulation is to assist markets with the aim to achieve efficiency.30 However,

such regulatory aim only holds if, ‘[t]he various conditions associated with the existence of

perfectly competitive markets are fulfilled… [t]he allocation of resources resulting from

perfectly competitive markets is ‘Pareto optimal’’.31 Even if the premises do not hold,

intervention to correct market failures is justifiable for the sake of financial stability, limiting the

effects of negative externalities and the prevention of future misconduct.32 The failures of banks

from the GFC experience and the scandals warranted intervention by the government. This took

the form of the introduction of the SMR. As Andrew Bailey said, ‘Responsibility, as embedded

in the Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their

own culture, and also to provide regulators with the powers to conduct supervisory oversight and

to act when needed.’33

Strengthening Legal Accountability via the New Senior Managers Regime:

Again, referring to the Report, it states that:

The Commission envisages a new approach to sanctions and enforcement against

individuals:

all key responsibilities within a bank must be assigned to a specific, senior individual.

Even when responsibilities are delegated, or subject to collective decision making, that

responsibility will remain with the designated individual;

30 John Armour, et al., Principles of Financial Regulation (Oxford University Press, 2016) 53. 31 Ibid., 54. 32 Ibid., 55-70. 33 Andrew Bailey, ‘Culture in financial services – a regulator’s perspective’ (Speech at the at the City Week 2016

Conference on 9 May 2016) < http://www.bankofengland.co.uk/publications/Pages/speeches/2016/901.aspx>.

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the attribution of individual responsibility will, for the first time, provide for the full use

of the range of civil powers that regulators already have to sanction individuals. These

include fines, restrictions on responsibilities and a ban from the industry;

the scope of the new licensing regime will ensure that all those who can do serious

harm are subject to the full range of civil enforcement powers. This is a broader group

than those to whom those powers currently extend;

in a case of failure leading to successful enforcement action against a firm, there will be

a requirement on relevant Senior Persons to demonstrate that they took all reasonable

steps to prevent or mitigate the effects of a specified failing. Those unable to do so would

face possible individual enforcement action, switching the burden of proof away from the

regulators; and

a criminal offence will be established applying to Senior Persons carrying out their

professional responsibilities in a reckless manner, which may carry a prison sentence;

following a conviction, the remuneration received by an individual during the period of

reckless behaviour should be recoverable through separate civil proceedings.34

It is evident that the government empowers the regulators to not only regulate senior managers

with stringent and demanding measures, if bank staffers behaved badly they will be held

answerable. As such, these senior bank managers do not just work for the banks and their

shareholders, the regulatory oversight under the SMR equips the regulators with the power of not

only intervening in the governance and operations of the banks, but also to hold these individuals

34 Parliamentary Commission on Banking Standards, ‘Changing banking for good: Report of the Parliamentary

Commission on Banking Standards, Volume 1: Summary, and Conclusions and recommendations’ 12 June 2013, 10

< http://www.parliament.uk/documents/banking-commission/Banking-final-report-volume-i.pdf>.

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personally liable for their decisions, indecisions, actions or inactions, as well as others under

their supervision.

The Report was also very critical of the previous regulatory measures, the Approved

Persons Regime (APR) as being too broad and insufficiently focused on senior management.35

Furthermore, the Report highlighted, ‘[t]he lack of clarity of responsibilities of individuals at

senior level’, and ‘[t]here were gaps in the regulators’ enforcement powers’.36 The wordings if

the ‘Statements of Principles’ were constructed in such a way gave management too much

leeway in terms of interpretation.37 It also seems to encourage management to demarcate their

responsibilities to satisfy themselves that their responsibilities had been met without looking

further.38 This led Bagge to note that, ‘There is a real danger that potential gaps in the firm’s

systems and controls may develop which will not be identified, although they may have been

caught by a flexible system.’39 Andrew Bailey adds that, ‘Responsibility, as embedded in the

Senior Managers Regime, is therefore an important hook to assist in firms’ shaping their own

culture, and also to provide regulators with the powers to conduct supervisory oversight and to

act when needed.’40

35 HM Treasury, ‘Senior Managers and Certification Regime: Extension to all FSMA Authorised Persons’, October

2015, 4

<https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468328/SMCR_policy_paper_final_

15102015.pdf>. 36 Ibid. 37 James Bagge, ‘Senior Management Responsibilities under the New Regulatory Regime’ (2000) 8, Journal of

Financial Regulation and Compliance, 201, 204-9. 38 Ibid., 209. 39 Ibid. 40 Andrew Bailey, ‘Culture in financial services – a regulator’s perspective’ (Speech at the at the City Week 2016

Conference on 9 May 2016) < http://www.bankofengland.co.uk/publications/Pages/speeches/2016/901.aspx>.

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The SMR became effective on 7th March 2016 for banks including building societies,

credit unions, PRA-designed investment firms and UK branches of overseas banks.41 The

legislative framework for the SMR can be found in the Financial Services (Banking Reform) Act

2013 that was consolidated in the Financial Services and Markets Act 2000 (FSMA). The senior

management functions were stipulated in section 59 of the FSMA. Section 60 of the FSMA

created statements of responsibilities for senior management. This includes vetting and approval

being required by the regulators.42 The regulators also have the power to vary the approval of

senior managers.43 More importantly, the FSMA delegated the power to make detailed rules of

the SMR to the FCA and PRA.44

The emphasis of the SMR rules is to increase the onus on individual accountability with

the introduction of statutory duties for the senior managers of banks.45 In particular, requiring

senior managers, [t]o take reasonable steps to prevent regulatory breaches from occurring, or

continuing to occur, in their area of responsibility.’46 Further, the regulators introduce specific

‘prescribed responsibilities’ which must be allocated amongst ‘Senior Management Functions’.

This is where each senior manager will be allocated responsibilities by the bank, and if the

responsibilities are shared, each senior manager will be wholly accountable for it.47 The

regulators also require banks to record their key governance arrangements in a ‘Management

Responsibilities Map’ describing the bank’s management and governance arrangements

41 Deloitte, ‘Senior Mangers Regime: Individual Accountability and Reasonable Steps’, (2016) 2

<https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-senior-manager-

regime.pdf>. 42 Section 60A, Financial Services and Markets Act 2000. 43 Section 63, Financial Services and Markets Act 2000. 44 Sections 59-63, Financial Services and Markets Act 2000. 45 45 Deloitte, ‘Senior Mangers Regime: Individual Accountability and Reasonable Steps’, (2016) 2

<https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-senior-manager-

regime.pdf>. Note that HM Treasury had announced in October 2015 that the SMR will be extended to all regulated

firms in the UK by 2018. 46 Ibid. 47 Ibid., 5.

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including the key reporting lines, committee structures and details about key management and

their responsibilities.48 ‘Senior Management Functions’ also need to complete individual

‘Statements of Responsibilities’ that clearly sets out the role they are undertaking and describing

those areas of the bank for which they are responsible.49 All of which denotes that senior bankers

must ensure they have full control over their areas of responsibility, everything senior managers

do or not do must be defensible with evidence to support those decisions.50

Senior management would be occupied with creating a paper trail of justifications or

explanation about satisfying their legal duties rather than the job of managing the affairs of a

bank like a business entity, in effect making banks more like quasi-governmental entities with

the threat of prosecution or at least, possible regulatory scrutiny constantly on the minds of the

executives. In particular, senior bank managers have to ensure whether everything they did or did

not do at work satisfy the legal test of taking reasonable steps to prevent regulatory breaches

from occurring under their watch or continue to occur.51 This would also involve taking

reasonable steps to effectively control their area of business responsibilities, to monitor the

delegated responsibilities, and at the same time, ensure those under them complied with all

regulatory requirements.52 Such regulatory duties would also encompass what the senior

manager knows or ought to know, whether due diligence was exercised in every decision, any

alternative actions he or she should have taken with proper risk assessments, and whether the

delegated responsibilities were properly arranged, managed and monitored.53 In short, the duties

are a non-exhaustive list of concerns and considerations to demonstrate that senior managers

48 Ibid., 5-6. 49 Ibid. 50 Ibid. 51 Ibid. 52 Ibid. 53 Ibid., 7.

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have undertaken all reasonable steps on an ongoing basis to meet the regulatory demands of the

SMR.54 Finally, the duty of an assigned responsible person to report to the regulators (FCA and

PRA or either) for breaches or disciplinary actions against an employee meant that the banks are

in effective assisting the regulators to police their staff. However, the new legal responsibilities

are no substitute for leadership. Besides, even if the new rules put the spotlight on the behaviour

and the decisions of senior management as well as how they manage, as noted earlier culture is a

social norm rather than a set of written rules, therefore those who make or shape norms need to

foster as well as nurture the right culture.

It is important to note that the approach and mindset from a business perspective about

‘the problem’ are quite distinct from legal solutions. This is evident in the discourse from the

business literature. Legal remedies can only go so far to transform the culture of banks and how

they are being managed. They need to examine business viewpoints about leadership and its

impact on the culture of organizations.

The Role of Leadership in Shaping Culture

There is a growing clamour for evidence of more ethical behaviour amongst leaders in the

financial arena. This, in turn, leads to a growing demand for organizations to overtly display

greater levels of responsibility, governance and promotion of ethical leadership to actively

illustrate that things have changed.55 The rush towards notions such as, authentic and ethical

leadership may have begun well before the economic crash of 2007, but nevertheless they do

54 Ibid., 11. 55 D. M. Mayer, M. Kuenzi, R. Greenbaum, M. Bardes and R. Salvador, ‘How low does ethical leadership flow?

Test of a trickle-down model’, (2009) 108, Organisational Behaviour and Human Decision Processes, 1-13.

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reflect a need to seek solace in what is positive about leaders and leadership in general. However,

in studying what makes for effective and ethical leadership we are faced with a number of

problems. There is a growing realisation that we have failed to investigate seriously what were

the leadership causes of the economic crash.56 This failure to explore what went wrong in

leadership terms encourages platitudes of change. Senior leaders in politics and banking might

talk about the need for ethical behaviours (as witnessed by Mark Carney, the Governor of the

Bank of England, in his 2016 Mansion House speech where he pledges to end the irresponsibility

practice that has gripped the financial sector), but we simply do not explore what this will be,

how it will be enacted, and more importantly, who is leading the way as exemplars. This tends to

focus attention towards notions of leadership and how leaders attempt to influence and change

culture.

Notions of regulation seem to be predominant, but lack overall awareness and linkage to

the market need for change. The main shock and awe strategy that organizations use to trigger

the leadership/follower life cycle of change is to invoke ‘the logic of the market’,57 which is a

series of linked change mantras intent on mobilizing support for cultural change throughout the

organization. The logic of the market suggests that unless the organization changes to adapt to

market conditions then there is a real and present danger to the position of the organization and

thus maintaining jobs and remuneration becomes increasingly problematic. The strategy of

employing the logic of the market as a cultural change technology requires a leadership strategy

to help construct a version of social reality that triggers the leadership/follower life cycle. The

logic of the market supported by regulation and skillful and effective communication is one way 56 R. Kerr and S. Robinson, ‘Leadership as an elite field: Scottish banking leaders and the crisis of 2007-2009’,

(2011) 7, Leadership, 151-173; D. Tourish, ‘Some announcements, reaffirming the critical ethos of Leadership, and

what we look for in submissions’, (2015) 11, Leadership, 135-141. 57 H. Willmott, ‘Strength is Ignorance: Slavery is Freedom: Managing Culture in Modern Organizations’, (1993) 4,

Journal of Management Studies, 515-38.

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to do this. The logic of the market must be supported by a grand spectacle that provides the

‘evidence’ that change is required. The current spectacle is both changing social and political

dynamics, which threaten a sense of survival of the business and financial leaders have to

skillfully present the case for cultural change around a change spectacle supported with the

change mantras. If they do this successfully then staff may elect to shift their identities to follow

if they feel it is in their interests to do so and if they also feel leadership can meet with their

survival needs. This strategy does work but it does not provide in many cases long lasting

sustainable cultural change.58 The preferred strategy would always be to cultivate a culture that

has the built-in capacity for organizational learning and cultural change wired in to its meaning

and value systems.

Another key aspect that leadership needs to address is the notion of power and culture.

The power of the dominant group can influence the cultural construction and performance of

attitudes, behaviors and discourses in organizations. Managers may be aware of alternative

cultural possibilities but feel disempowered as a result of the constraining effect of corporate

culture.59 Cultural control may be achieved through the symbolic use of power by privileging

particular expressive events. Expressive hegemony as a form of power has the potential of

‘freezing’ a particular perspective on social reality. It does this by excluding alternative

discourses. These discourses create the very possibility of cultural change by opening up for

discussion a review of existing ideologies, practices, social/political/strategic and technological

orientations. Appreciating the role of power, in shaping realities, is crucial in understanding the

dynamics of cultural management which is primarily concerned with controlling the agency of

58 D. Buchanan, L. Fitzgerald, D. Ketley, R. Gollop, J. L. Jones, S. S. Lamont, A. Neath and E. Whitby, ‘No going

back: A review of the literature on sustaining organizational change’, (2005) 7, International Journal of

Management Reviews, 189–205. 59 M. Alvesson, Understanding Organizational Culture (Sage Publications, 2002).

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employees, their identity choices, the concepts in uses and the forms of every day talk and thus

the shaping of organizational reality perspectives. Regulatory activities can begin to shape the

discourse of change; however, the deep-set and embedded power culture also needs to be more

formally addressed.

There will always be opposing forces in organizations, which may influence the outcome

of cultural struggles. This perspective illustrates the pluralistic nature of organizations, which

renders the perspective of an integrated culture that is based on the harmonious consensus of

meaning highly problematic. The concept of organizations as sites of power struggles over

meaning definitions introduces a paradigm to consider. The biased integrationist and

functionalist approach to cultural change which is popular in the literature and both consultancy

and managerial practice, fails to acknowledge how managerial practices reproduce and protect

relations of power in organizations and render functionalist and regulatory change as politically

naïve.

The primary activity of corporate culturism is to re-engineer organizational culture

through meaning management. The objective is to construct consensus with what is perceived as

just, valued and therefore considered as real and worthwhile. Hegemony is concerned with

creating management cultures where the availability of alternative value positions or

organizational perspectives are systematically cleansed. This cleansing occurs through the

domination of discourse and the censorship and subjugation of alternative discourses that do not

fit the dominant narrative. Corporate culturism may not have articulated its agenda as hegemony

but the techniques, applications and guiding theory of cultural management are concerned with

managing the definition of reality on the part of the workforce. Corporate culturism was and

remains fundamentally concerned with the socio-ideological control of the interpretative and

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expressive capacity of the organizational self. How managers process their inter-subjective sense

making activities is central to understanding the dynamics of organizational and how best to

approach cultural change interventions. This is exemplified the works of Kerr and Robinson and

their assertion that there is greater value in considering leaders as members of an elite field with

the concentration of power in these elite groups.60 This has a lot to do with not perceiving

leadership as an individualistic phenomenon or as constructed along a leader/follower axis.61

Grint sounds a note of caution concerning leadership.62 His arguments centre around socially-

constructed notions which create a sanctity around the concept of leadership and, ‘[t]herefore, we

need to consider not how to revoke the sacred leadership of individuals (and I use the plural of

individual as distinct from the collective – ‘group’ purposely) but how to bind those individuals

closer to the communities they lead without requiring the community to strangle

individualism.’63

Thus far a brief review of the literature on leadership has made plain that the enactment

of legal measures to hold senior bank managers individually accountable is unlikely to change

the way they behave in a meaningful way, let alone the culture of banks. It is fair to say from a

business perspective laws do not change culture, people do. However, this is not to claim that the

law reform is unimportant. In fact, reforming the law denotes a change in standards of behaviour.

The next step is to explore how leadership can inform the law to facilitate change for the better.

60 R. Kerr and S. Robinson, ‘Leadership as an elite field: Scottish banking leaders and the crisis of 2007-2009’,

(2011) 7, Leadership, 153. 61 K. Grint, ‘Problems, problems, problems: The Social Construction of Leadership’, (2005) 58, Human Relations,

1467-1494. 62 K. Grint, ‘The Sacred in Leadership’, (2010) 31, Organization Studies, 103. 63 Ibid.

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Conclusion and Commentaries:

Recent reforms are aimed at transforming the way the financial services sector in the United

Kingdom does business. A cornerstone of the new regulatory measures is to regulate the culture

of banks by imposing more rules to ensure senior bank managers are accountable for their

actions, inactions, decisions and indecisions, as well as others under their watch. Whilst this

appears to be a neat compartmentalization of the ‘problem’, the premise of this regulatory

prescription is that leaders have or should have absolute control of the affairs of the organization.

However, a brief survey of the literature on leadership reveals an entirely different picture. More

research into the dynamics and consequences of how regulations affect the leadership and in turn

shape the culture of organizations is critical to finding practical solutions. Without meaningful

dialogue between business viewpoints about leadership and the legal approach, it is difficult to

see how the reforms could work in actuality beyond superficial compliance.

With Brexit negotiations about to commence, it is even more crucial for the United

Kingdom to bolster public assurances in financial services sector because the GFC and recent

bank scandals have demonstrated that the combination of market uncertainty and corporate

misconduct can create an economic crisis. This calls for robust regulations and good leadership

to promote confidence. Therefore the answer is to strengthen legal accountability and nurture

better leadership.

Another aspect of this reform that was not discussed in this paper, but warrants further

investigation is the issue of the international elements of leadership and organizational culture.

The SMR not only applies to banks in the United Kingdom, it is also mandatory for certain key

executives in overseas branches. Since leadership is interpreted in different ways and in different

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lands and languages,64 it would therefore appear necessary to examine the context, ‘[t]hat both

legitimates a particular form of action and constitutes the world in the process.’65 To accept the

existence of worldviews means to research cultural leadership within the financial sector in a

wider, culturally diverse perspective, understanding differing philosophic frameworks and being

sensitive to the history and needs of different cultural communities.66 From a legal perspective

this is even more crucial to the efficacy of the new rules as leaders in non-Western countries like

those in Asia, would lead and run the business from a different mind-set compared to what the

laws in the United Kingdom prescribe.67 In short, we argue that law reform is only the beginning

of the journey to regulate the culture of banks.

64 E. McElhatton and B. Jackson, ‘Paradox in harmony: formulating a Chinese model of leadership’, (2012) 8,

Leadership, 441. 65 K. Grint, ‘Problems, problems, problems: The Social Construction of Leadership’, (2005) 58, Human Relations,

1471. 66 D. Ruwhiu and M. Cone, ‘Advancing a pragmatist epistemology in organisational research’, (2010) 5, Qualitative

Research in Organizations and Management, 108-126. 67 For example, see Angus Young, Family Business and Corporate Governance in Hong Kong (Wolter Kluwer,

2014).